I don?t normally write much on economics, largely because I think its one step above fortune telling?maybe. You look into the tea leaves (?economic data?), sift it around a bit and make predictions about what you think is happening and more particularly, about what you think WILL happen.. Hence the fortune telling analogy.
So why am I sticking my hand into this hornets nest of omniscience? Mostly because I write about personal finance, and I?m of the opinion that personal finance without some concept of economics is akin to taking off in an airplane without radar. How do you know what to prepare for if you have no concept of what it is you?re heading into?
Even though my crystal ball is still malfunctioning, I figure I?ll take a stab at what I think is happening in the economy and where I think we?re heading. Heck, even without it I doubt I can do a more laughable job than the people who do it professionally, also known as ?economists?.
Warning: this won?t be light reading?and for some, it won?t be at all pleasant.
What I think is happening
We?ve had economic problems in the past, many of them in fact, but I think most of us have an idea that there?s something different happening this time, something more ominous. My experience is that when the ?little voice inside? is telling you something is wrong, it usually is. Here?s what I dare to think it is?
At the risk of sounding simplistic, we?re now experiencing the end of the Age of Bigness. Sounds goofy, I know, but please read through before dismissing it.
The end of the Age of Bigness is the flip side of the Industrial Revolution. When industrialization began, the apparatus for growing systems – let?s call them mega-systems – began to develop and spread throughout the industrialized world. Once started, they could leverage people, capital and resources in a way that enabled them to go on permanent growth trajectories. Consider the following:
Big Government. Up until about 150 years ago, government was little more than a monarch of some sort, his ruling council and a small army that could grow only during war. Today we have all-encompassing government which not only makes laws and maintains national defense, but also provides cradle to grave benefits for the populace and is somehow involved in nearly every aspect of our lives right down to the most personal level.
Big Business. For thousands of years the economy of the world was based on cottage industry and family farms. Today we have conglomerates with operations in dozens of countries but loyal to none of them.
Big Education. Not even 100 years ago, one room school houses were the backbone of education, and career training was based on the apprentice system. Today we have statewide public school systems and university systems with multiple campuses and tens of thousands of students.
Big Media. Until radio came out in the early 1900s, the only trace of the media was the local independent newspaper. Before that it was gossip and the town crier. Today, not only do we have radio and TV, but most of it is joined in media conglomerates with global reach.
Big Healthcare. Long gone is the witch doctor or high priest, or even the country doctor. And increasingly, so is the local general practitioner. They?ve been replaced by expansive healthcare systems run as Big Business. The patient is sent from specialist to specialist, rarely having more than a few minutes with any.
These are just the most prominent examples of the modern age trend toward bigness, but there are others. Each provides certain benefits to the population, but the cost of maintaining the systems themselves is now exceeding those benefits. The de facto evidence is found in the perpetual rise in prices and the need to use debt to keep them afloat.
That system of bigness, I believe, is coming to an end and represents the source of the dislocations we?re now seeing and trying to deal with.
Evidence of mega-system failure at all levels is all around us. Consider the following:
- National governments are existing in a state of perpetual deficit – in the US alone, more than 25% of the federal budget is ?funded? by borrowing.
- Local governments have turned to police citations to fund operations.
- Big healthcare runs almost entirely on government and private health insurance plans (as opposed to cash payments) which now carry premiums the size of house payments; tens of millions are going without them for lack of ability to pay.
- Virtually the entire pension system in the US, both public and private, is facing a massive funding crisis.
- The university system, which has exploded in size and scope, is funded largely by student debt that can leave the student with a six figure liability upon graduation.
- The value of any system is in its simplicity, but mega-systems have become increasingly complex, often requiring thick manuals or the hiring of lawyers to navigate.
- Most debate in regard to the various mega-systems centers not on improving them, but in keeping them afloat!
Far from being synergistic, maintaining The System is now both cumbersome and prohibitively expensive. Not only are the various sub-systems straining to keep themselves afloat, but the citizenry is struggling to comply with supporting them.
The Industrial Revolution-inspired model of increasingly large systems that facilitated growth for a century and a half is broken. ?The System? can no longer fix itself and is an obstacle to progress. The System is now in survival mode.
Where I think this will lead
There might be a temptation to consider this as a bad news assessment, and while it is in the near term, I think it will ultimately lead to a better place.
We went from ?smallness? to bigness during and since the Industrial Revolution, and now we?re likely to return back to smallness. Cottage industry, in the form of at-home self-employment will gradually replace big employment centers, as nearly anything done in a large organization can be done by a one man or woman shop from home and done at less cost.
The at home revolution will force more self-reliance and reliance on local community – where it had been for most of human history. Meanwhile, technology – the magic bullet many expect to solve our biggest problems within the scope of The System?far from fixing it, will hasten it?s end.
Consider what technology is doing and what we can reasonably expect it to do in the near future:
- Computers and the Internet – These technologies are already here and having a major impact moving into the world I?m describing. They have taken commerce out of the ivory tower and put it back in the home, launching a revolution in the modern equivalent of cottage industry.
- Electric cars – We?re not quite there yet, but we?re on our way. This has been talked about for 30 years but it?s finally hitting the scene for real. Current batteries for all-electric cars can?t sustain 100 mile charges now but they?re improving quickly. When a battery that can go 200+ miles between charges arrives for real it will break big oil and it?s monopoly on motor fuel, and empower the individual.
- Renewable energy – wind and solar – Again, we?re getting to the point where renewables will be cheap enough to compete with fossil fuels, and once that happens in earnest, utility monopolies will be broken and individuals will be empowered.
Consider the combination of electric cars with renewable energy generated from at-home solar panels or windmills serving as the power source; now combine this with the income generating capability that computers and the internet afford. All will enhance individual economic, political and personal freedom, but the decentralization will prove crippling to The System.
How things are likely to play out between now and then
It would be a massive advantage if we could jump from where we are now – with an anemic and declining economy – to the future I just described – but it won?t happen that way and that?s where things are likely to get a lot worse than they are now. Here is what we?re likely to see play out between now and the better future:
- System based debt structures are already unsustainable but will be even more so in a decentralized economy and will have to unravel; the meltdown since 2007 was probably the start of a process that?s likely to get much worse.
- The System can be fully expected to dig in and resist its own destruction. Collectively, the majority will continue to look to The System for salvation – to their own peril.
- Massive economic dislocation and disenfranchisement will occur as the unraveling of The System moves more quickly than the shift to individual reliance.
- One man/one job will be coming to an end as income from traditional jobs continues to erode and workers are forced into involuntary self-employment and the pursuit of multiple income streams.
- Contrary to popular belief and in spite of populist speeches by politicians, the state will resist – not facilitate change. Big systems are far easier to tax and to regulate than an economy based on tens of millions of self-employed individuals.
- Government budget issues are likely to get worse, even much worse, as change moves through the economy.
- Colleges and universities will be unable to provide educations relevant to a decentralized economy that runs on millions of unique businesses. Nor will they be able to compete with online training that will be only a fraction of the cost. Meanwhile The System has abandoned training or retraining. Self-study will become the preferred route to ?higher education?.
Most of these aren?t even a stretch – we?re already seeing them play out to one degree or another. This is just a matter of projecting current trends out to their logical extremes.
Strategies
This is a time for neither blind optimism nor gloom and doom, but openness to change, flexibility, and a willingness to grow and take chances. Specific strategies are difficult to project since the situation is in a state of flux. But going forward, strategies that will attempt to work in this direction will make up much of the content on this website.
My suggestion is to look closely into moving into some form of self-employment, as it is increasingly becoming the best long-term solution to a career crisis. Try to build your business as a side business, that way you will reduce the risk and give yourself as much time as you need to make it work. The ability to make a living without having a traditional job may be the key to survival in the future.
What do you think? Do you see any of this playing out? Do you see things going in a radically different direction? Or do you think that The System will ultimately cure itself and keep us on a more traditional path?
Can you offer any strategies to help us deal with these changes? If you?d like to write a post, either challenging my predictions, supporting them or proposing strategies, feel free to contact me at kevin (at) outofyourrut (dot) net and I?ll publish it.
Kevin – you are a brave soul to tackle such a subject. Where do I agree with you: Government is TOO big. Government, particularly centralized government is inefficient, expensive and intrusive. I think most of problems you mentioned can be traced back to government policies. The problems in healthcare and education (expecially education) can be traced to government regulations, subsidies, and control. I don’t have a problem with big business until government steps in and bails them out. That is wrong and has produced “too big to fail”.
I believe we are in a 18-20 year bear market brought about by this shift you are describing. It began in 2000 with the dot.com bubble, was exaggerated by the housing bubble, and now the last shoe to drop is the downsizing of governement.
If we choose government in the 22-25% of GDP range we will have high unemployment and slow growth for decades to come. If we choose to go back to the 16-18% of GDP range we will have better chance of America being competive again.
Thanks for allowing me to share my thoughts.
Ken Faulkenberry
http://ArborInvestmentPlanner.com
Hi Ken, I don’t see any of the mega-systems completely disappearing, least of which government, but I do expect to see MAJOR contractions. I have no idea at what percentage of the economy government will return to some level of efficiency, but what ever that number might be it’s well below where it is now.
In regard to Big Business, I think that the problem with separating–as in this mega-system is tolerable where another isn’t–is that all of these systems have grown in tandem, and continue to exist as such. A major contraction in big government would cause a contraction in the rest, but all are dependent on one another.
It’s big business which has brought us big oil and the utility monopolies that have largely enabled government to get so big. Then legislation protects those monopolies by limiting competition. Each mega-system needs the others to survive and grow.
I agree with you. In fact, I wrote a science fiction novel about the far future that envisions high-tech but small-scope living.
Centralized everything really depends on cheap energy. As that becomes harder and harder to come by, I see the USA returning to the small towns of 100 years ago, but wired for internet communications. Cheap, mass-produced products shipped halfway across the world will stop. We’ll have to have communities that are pedestrian-based, with mass transit to move community to community.
It’s not an unpleasant world, but much different, and the transition from our current big-everything culture will be painful in the short term.
Hi Pete–Thanks for the comments. I didn’t want to take an environmental slant with this post, but it’s inescapable. Mega-systems have been largely responsible for most of the environmental damage to the planet. Not because mankind hadn’t been doing it before, but because mega-systems automate everything to the n-th degree, and they’ve done that with damage to the environment in the same way that they’ve automated production, consumerism, communication and everything else.
It’s even ocurred to me that if the economic brakes aren’t applied soon, environmental brakes will be applied in the form of famines and natural disasters. Since the Industrial Revolution, the population has been growing geometrically, and so has mineral and energy depletion, deforestation, pollution, and use of synthetics and chemicals with questionable long term consequences. All so that we can have life on a grand scale.
At some point, either that trend reverses, or we deal with the consequences of mega-disasters. What we’ll be experiencing in the short run may prove to be an act of Supreme mercy; from visiting your site, I think you get where I’m coming from with that conclusion…
Hi Kevin, I agree with you that you can’t make financial plans if you don’t have educated opinions on the global trends. Otherwise, you will just do what the majority do which may or may not be a good idea.
Your mega-trend of consolidation makes sense. Businesses get larger and more powerful, governments extend their influence into matters that used to be considered private, and your Social Security number is necessary to track and catalog you for everything from licenses to health care.
However, I see some backlash to this trend. Family farms are seeing a resurgence as consumers choose small, organic producers. Blogs are competing with mainstream media for attention, and more young people are considering entrepreneurship. These are good things in my opinion. 🙂
I also agree that some systems have become too complex to succeed. The “too big to fail” have become “too big to bail” as my friend Bill Murphy puts it. If we transition to a more decentralized system, and I fervently hope we do, the short term pain will be immense for the average person. All the attempts to put off the day of reckoning will make it that much worse when the inevitable happens.
The biggest difference between my view and yours is that I am much more pessimistic about renewables. The US has literally wasted decades with little serious work in this area. It’s going to take the equivalent of another Manhattan Project and a big change in public attitudes to change this, in my opinion. People want to use an enormous amount of power per person, but don’t want to live near a wind farm, or allow their neighbors to use solar panels, or make biodiesel next door. There are many places where it’s illegal to use a clothesline outside!
Well I’ll quit now before this becomes post length. 🙂
Hi Jennifer, It sounds like we’re in general agreement except for a few details! I agree on the development of small family farms and of blogs, and see that as an outgrowth, or response to mega-systems. I see this happening all over, on a small scale, but expect to see it expand over time. All good news.
On renewables, the reason for my optimism is that I think it will happen organically, in reponse to either high energy prices, supply disruptions or both. There won’t be any Manhattan Projects, this thing will come from the ground up. It’s lack of reliance on the system will be it’s strength. It’ll develop apart from the system. As far as those opposing it under NIMBY mindsets–when oil prices get high enough, they’ll be begging to have it in their backyard.
LOL Kevin, is that a picture of you?
Do you think there are steps that we can all take to improve the present economy?
I am so over the discussions of why it is bad and ready for how to improve it. Yes, one of my days of needing some HOPE 🙂
My Website: Surviving Unemployment!
http://survivingunemployment.weebly.com
Hi Angela–That’s the Million Dollar question, how do we all adjust to it? This is a tough topic, no doubt.
This post was my attempt to explain what it is we’re dealing with, and as you can see I think it’s much deeper than we want to believe. I think our economic problems are beyond politics and business-as-usual, which is why things seem hopeless. What ever is being done in the big picture seems to be falling short, and I think that the unemployment situation is much worse than we’re being told.
These are just my thoughts for starters–I’ll try to develop more in future posts…We’re being forced into greater self reliance, and we probably need to go with that and accept it as the new way of the world. What ever training we need, we’re going to have to get it–on the web, in the library, through trial and errror, from other people, even working for free just for the experience.
As far as work, we’re probably going to need to mix some form of self-employment with less than perfert employment. That may mean part time, seasonal or contract work. Or taking a job that doesn’t pay much.
We’re also going to need to keep our eyes and ears open to find where new industries are developing. When an industry is pretty new, it’s usually easier to get into because no one has much experience. I think alternative energy will be a great field in the future but is isn’t quite here yet. And as you pointed out in another comment, there’s some scamming going on in that industry based, probably based on the promise it has but little else.
It doesn’t look as if much is permanent in the job world anymore, and the solution may be to develop two or three incomes where ever we can.
The other side of the coin is expenses–we need to travel light by keeping them to a minimum. Now isn’t the time to take a chance on a large house or car payment, we just don’t know what the future holds.
The single biggest concern is healthcare–private policies are expensive and not always easy to get. In my thinking, this will be the real X Factor for a lot of people. There’s no easy way around this one!
But this is our time, and though it may be ugly, we have to make it work. I think the road will be bumpy, but we’ll have to adjust.
Oh–no, that’s not me on the cliff; I don’t do cliffs. Walking on level ground is dangerous enough for me…
Hi Kevin:
I finally made it back to see what your reply was (lol).
The challenge I am facing personally is being “in between” the younger generation with a bunch of kids and the older folks. With tax breaks now in place, companies are electing to hire the “welfare” crew first. Really cannot blame them as I would do the same – hey FREE money! Now on to the older generation. Why can’t they put in place some programs for say the age 30 to 55???? I will be 53 in a few months and all the “senior” programs are for 55 and older (lol).
Hi Angela – You’re hitting on something that’s become “normal” in the economy–which doesn’t surprise me since you’re like a voice from the front line!
Middle-aged people are most at risk for job loss, and it’s been written in a lot of places. For some reason, middle aged men are especially vulnerable–not the least of which because many have criminal convictions. Young people will “work cheap”, but middle-agers are higher on the payscale (even though many will work for less) and higher costs for company health insurance. Everything is so complicated right now–and that’s another problem by itself.
The problem with electric cars isn’t really the range, if there was an infrastructure to pug them all in at stops. However, the bigger problem is creating enough extra energy in the grid so you aren’t just substituting oil for coal.
Hi Shaun–That’s an excellent point. It will mean that we’ll just be shifting the way we consume energy from gasoline to electricity, which is no improvement in the status quo. My own sense is that electric cars and renewable energy will be traveling companions, rising simultaneously as the foundation of a new industrial revolution. That is of course my optimistic view–it may not play out that way and 20-30 years from now we’ll still be driving gas powered cars and searching the globe and fighting endless wars to keep the oil flowing. If that’s the case, we’ll be looking back on 2011 as “the good old days”. There’s no way we can move forward economically, environmentally or even socially if we move into the future still tethered to fossil fuels.
Fully agree with your analysis Kevin, I preach much of this to friends and family and find that they are not as passionate about it as I am. Most people don’t seem to want to prepare and ready themselves for any kind of change, they aren’t willing to sacrifice. One thing that I didn’t read in your wonderful post was the possibility of civil unrest. I think it is a strong possibility, look at what is happening in Egypt! We are witnessing a time in which the flames of partisanship are being excessively fanned by the party with 2/3 of government power. I.e. Look at how many states are having to defend their own voting laws from this administration. I personally do not understand what their end game is? Exceptional post by the way!
Thanks again Jim. I don’t want to go into civil unrest, and hope we don’t reach that point. Whenever that happens you open up the floodgates to unexpected outcomes. Most armed revolts don’t improve anyone’s situation, the US Revolutionary War was one of the best exceptions. Egypt, Libya and Tunsia are still open questions, and much more typical outcomes.
It would be much better if the people would gradually adjust to change, and prepare for life in a very different world. Much like the latter days of the Roman Empire, The System might shrivel and become irrelevant in the face of massive change from the bottom up.
I’m not surprised at the reaction from your friends, most people don’t want to accept that we aren’t going back to the Post World War II era, of job security, predictability and world domination. It may be another generation before Americans will finally accept that the game is changing for good. Right now the expectation is that we’ll re-engineer ourselves back to the 1990s. But everything has changed so fundamentally in just the past 15 years or so.